Dollar Outlook: Government Shutdown Risk Suppresses Markets, Dollar Index Drops Below 50-Day EMA

The U.S. Dollar Index (DXY) fell below its 50-day moving average on Monday, down 0.32% to close at 97.774, as traders assessed the risk of a looming government shutdown and watched the release of a series of U.S. economic data.

Late last week, the dollar failed to hold the key retracement range of 98.238-98.714, followed by a lackluster rally, and now faces the key technical support level of 97.412 - the 50% retracement of the recent 96.218-98.605 range. A break below 97.199 would confirm a short-term trend reversal, putting the index in a bearish pattern.

Shutdown fears cloud the outlook for the dollar

Fears of a possible US government shutdown weighed on sentiment as the September 30 funding deadline approached. Failure to pass the spending bill would force several government entities to shut down, with the first day of fiscal 2026 falling on Wednesday (October 1).

Analysts point out that the dollar usually weakens before a government shutdown, but tends to rebound once the problems are resolved. But this particular situation poses a greater risk to market pricing: a prolonged shutdown could delay the release of key economic data, including Friday's non-farm payrolls report, which is expected to show 59,000 new jobs and an unemployment rate of 4.3 per cent.

Federal Reserve News: Governor Cook Faces Legal Threat, Interest Rate Cut Expectations Ferment

The situation has taken on new variables: uncertainty over the Federal Reserve's leadership is also weighing on the dollar, and a legal dispute over the possible removal of Governor Lisa Cook is heating up.

An appeal has been filed with the Supreme Court to rule on whether the president has the right to remove him from office by law - a move that could raise questions about the independence of the central bank.

At the same time, traders expect the Fed to cut interest rates by a cumulative 40 basis points by December and 110 basis points by the end of 2026, reflecting a pick-up in expectations of easing following recent hawkish data.

The interest rate spread narrowed, and the yen led the G10 currency

The yen was strong on Monday, rising 0.6 per cent to Y148.67 against the dollar, recouping some of last week's losses. That was backed by bets that the Bank of Japan would turn hawkish. Economists at Jefferies are leaning towards shorting the dollar/yen exchange rate on the grounds that the Bank of Japan is likely to raise interest rates and that regional foreign exchange policy may be adjusted.

At the same time, all US Treasury yields fell: the 10-year yield fell to 4.145 per cent and the two-year yield to 3.631 per cent as traders braced for key labour market data.

Market Outlook: Bearish after falling below the support level of 97.412

(Dollar index daily chart, source: Internet)

At present, the US dollar index has fallen below the 50-day moving average and is facing the key support range of 97.412. There are downside risks to the index. If it falls below 97.199, it will confirm the trend change.

Until then, traders will continue to monitor the progress of the government shutdown and labour market data - factors that are likely to recalibrate expectations of a Fed rate rise and, in turn, affect the dollar.

At 00:22 Beijing time, the US dollar index was trading at 97.9089/9280, down 0.25%.